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“The Fed’s policies have actually led to a lot of problems around the world,” Marc Faber begins his discussion with Bloomberg TV’s Trish Regan, especially “people in the lower income groups [who] spend say 30% of their income on energy, transportation, and so forth, electricity and gasoline.” The Gloom, Boom & Doom Report author goes on to discuss everything from how the Fed is creating a two-class system around the world, the inexorable growth of governments, buying votes, Bitcoin, interest rates, wealth taxes, and overall market valuations. “We are in a gigantic financial asset bubble,” Faber explains, “everybody’s bullish,” but he sees a slowing global economy (as do we e.g. Baltic Dry Index); “[The bubble] could burst any day. I think we are very stretched.” Faber is on fire…
Take 10 minutes and listen…
Prepare yourself… “In China, if I say what I am saying about the USA, they would not let me in the country”
Faber on the Fed and how far the ‘rubber band can be stretched’:
“We have to distinguish between the financial economy, the financial sector, and the economy of the well-to-do people that benefit from rising asset prices, from rising prices of wines, and paintings and art, and bonds, and equities, and high-end properties in the Hamptons and West 15 here in New York and so forth — and the average person, the typical household, the so-called ‘median household’, or the working class people. And the Fed’s policies have actually led to a lot of problems around the world in the sense that they’re not only responsible, but partly responsible that energy prices are where they are, they’re up from $10 or $12 in 1999 to now around $100 a barrel. Food prices are up and a lot of other prices are up. So on your income, energy prices have very little impact because you at Bloomberg – you, young man – you make so much money. But for the poor people, it has an impact.Some people in the lower income groups, they spend say 30% of their income on energy, transportation, and so forth, electricity and gasoline.”
On whether the Fed is creating a two-class system:
“Correct, largely. The problem is then that you have people like Bill de Blasio, they come in and say: ‘you know what’s the problem? All these rich guys. Because of these rich people, you are poor. They take advantage of you. So, let’s go and tax them.’ The IMF has come out with a paper in Europe that essentially the well-to-do people should pay a 10% wealth task — a one-time wealth tax. I can assure you, a one-time wealth tax, 10%, will become an every-year’s tax eventually.”
On how to help the people on the lower end of the economic spectrum:
“This is the point I’d like to make. All of these professors and academics at the Fed who never really worked in the private sector a single day in their lives, and write papers nobody reads and nobody’s is interested in. Why would they want not write about how you structure an economic system that lifts the standard of living of most people? You can’t lift everybody.”
“We had that in the 19th century in the U.S. because we had very small government at the time. The entire government — local, state federal — was less than 20% of the economy. Now it is close to 50% of the economy.”
On whether the government is spending too much money:
“The larger the government becomes, the less economic growth you have and the more crony capitalism and corruptions you have. Because big corporations — and especially the money printers, they’re the most powerful people in the world, they control the governments. The U.S. Treasury, the Federal Reserve, and the government is one and the same. The Fed, they finance the Treasury, so the government can go to war in Iraq and Afghanistan. Then they finance transfer payments to essentially buy votes so you can get elected.”
“I prefer physical gold and silver, platinum to bitcoin. Bitcoin can have a lot of competition. Gold, silver, platinum — they have no competition. How do you value a bitcoin? I can value gold to some extent and compare say gold to the quantity of money that is floating around the world, to the wealth increase, and to the monetary base increase, to the credit increase, and so forth and so on, and to the production costs. So I have an idea of where gold should be. I’m not sure because prices overshoot. How do you value Netflix? Is it overpriced or underpriced? Is Tesla overpriced, underpriced?”
On interest rates:
“But one thing I wanted to show you and talk about because you said that lower interest rates help people. Well, if money trending helps everybody, then why does not everybody in the whole world always have zero interest rates? And everybody would be rich. You keep on printing money and you don’t need to work here, you don’t need to put on makeup. I could stay in bed the whole day and go drinking in the evenings. So, let’s just print money and be all happy. It doesn’t add up. One thing about the figures you showed: first of all, you live in New York. Do you really think that your cost-of-living increase is a 1.2% per annum? You really believe that? It doesn’t feel like more, it feels like five times more, or even ten times more.”
“Number two, by keeping interest rates at zero percent on the Fed fund rate — i want to emphasize that this is now going on in March of 2014 for five years. It is not something new. For five years this has happened. You penalize the income earners, the savers who save, your parents, why should your parents be forced to speculate in stocks and in real estate and everything under the sun?“
On his view of overvalued stocks, including Facebook:
“I think it is to a large extent a fad. People they go on Facebook – what they do is they put pictures on and the only people that watch these pictures are themselves. They all want to be stars. It is a very distractive kind of occupation. I can’t imagine that this would have a lot of value. I would rather own – I don’t own it because I think it is very highly priced – I would rather own a company like Alibaba or Amazon or Google, than Facebook, personally. This is my view. Other people have different views. That’s what makes the market. Some people are buying it and some people are selling it.”
On overall market valuation concerns:
“I think we are in a gigantic financial asset bubble. But it is interesting that that despite of all the money printing, bond yields didn’t go down. They bottomed out on July 25, 2012 at 1.43% on the 10-years. We went to over 3.0%. We’re now at 2.85% or something thereabout. But we’re up substantially. Now, this hasn’t had an impact on stocks yet. In fact, it pushed money into the stock market out of the bond market. But if the 10-years goes to say 3.5% to 4.0%, then the 30-year goes to close to 5.0%, the mortgage rates go to 6.0%. That will hit the economy very hard.”
“[The bubble] could burst before. It could burst any day. I think we are very stretched. Sentiment figures are very, very bullish. Everybody’s bullish. The reality is they’re very bullish because they think the economy will accelerate on the upside. But my view is very different. The global economy is slowing down, because the global economy’s largely emerging economies nowadays, and there’s no growth in exports in emerging economies, there’s no growth, in the local economies. So, I feel that the valuations are high, the corporate profits have been boosted largely because of the falling interest rates.”
Some have dreamt of it, others have only imagined it. Now Saxo Bank, the online multi-asset trading specialist and investment advisor has released its ‘Outrageous Predictions’ for 2014. They fully admit that the probability of any of them coming to fruition is rather low. But, that hasn’t stopped them making them. Be outrageously provocative and it can be predicted that as sure as eggs are eggs the crystal ball will go cloudy on you. But, it makes for light-hearted reading along the rocky road of fortune-telling. The saving grace is that if any one of them does actually hit the truth on the nose, Saxo Bank will be saying ‘I told you so’. If they don’t come true, Saxo’s drivel will be forgotten in the mass of pages on the internet.
Predictions for 2014
- Soviet-Style Economy in EU: This one comes from Steen Jakobson, Chief Economist and CIO at Saxo Bank. It tops the list. The Soviet-Union will be back in force in style at least in the EU, when deflation causes panic amongst the leaders of the EU. Wealth Taxes will be introduced across the Union in the attempt to reduce inequalities in society. Europe will at last move into the final stages of totalitarian government from Brussels.
- Fat-Five Tech Companies: Amazon, Netflix, Twitter, Pandora Media and Yelp are all trading at about 700% above market valuation. That’s while the rest of the information-technology sector is 15% under market value. The bubble will burst in 2014 for the fat five. Some of that flab just has to come off.
- US Deflation: It’s only the US government and the Federal Reserve that are saying that the US economy is doing better. January will see the FOMC dealing with deflationary pressure on the economy as consumer confidence gets a whacking and employment and investment take a beating after Congress ends up ‘disrupting the US economy’ again.
- Brent to Fall to £80/Barrel: Sanctions against Iran are going to ease. This coupled with the problems that will seem to abate in Libya will see the price of oil fall drastically. Non-Opec supply is predicted also to increase by 1.5 million barrels per day.
- CAC40 to Drop 40%: They don’t call it the 40 for nothing. The French economy will fall like pigeons being shot out of the sky. The investors in France will be scrambling for the way out as the French government ends up taking a lashing.
- Fed Tapers: March-time will cause widespread panic on the financial markets. Apparently the prediction is that Yellen will resign and that Bernanke will be called back. Oh, there is a Hollywood film too of what happens when Yellen gets kicked out of the comfy bed.
- Germany to Need Bailout: Germany will fall into recession and end up asking to be propped up by the European Central Bank. Let’s hope the Greeks agree to that one.
- Spain to Recover: Spain is set to become the strongest economy in the EU.
- Russia to Turn Tails: Russia will turn to the Western world and end up crying in mummy’s skirts as there are escalating costs of the Olympics and plunging oil prices. Russia will give up on Syria and will cave in to Europe on energy prices.
- China to Revolt: The Chinese will become emboldened and empowered in the face of their government as the one-child policy is loosened and the residency program comes to an end. Urban cities will see demonstrations and the government will change its policies bring the country into modernity.
Outrageous Predictions for 2014
Steen Jakobsen, Chief Economist at Saxo Bank states “This isn’t meant to be a pessimistic outlook. This is about critical events that could lead to change – hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented”.
That’s all well and good except for the fact that looking back in history, changes rarely happen even at the crossroads of a crisis. Things carry on as they always did and it’s just business as usual. The banks haven’t changed the way they do business and governments haven’t changed the way they do theirs.
Apparently, the idea behind the predictions is to make people think of the worst-case scenarios that might possible happen in the world and to be in a position to adjust investments accordingly. Hype or outlandishly canny laughable material?
How many of the predictions do you go along with?
I spent a while last night reading David Holmgren’s latest essay Crash on Demand (read the PDFhere). Back in 2007 Holmgren, who is one of the initiators of the concept of Permaculture, wrote a series of possible future scenarios in which he posited a number of different scenarios that could play out with regard to civilisation and the environment. I won’t go into those scenarios here but suffice to say that this latest essay represents an additional one – and a new way of thinking.
The two civilisation destroying situations we face are peak oil and climate change. Holmgren goes into some detail about why his perception of these has changed, concluding that peak oil has not yet turned out to be as bad as expected (for various reasons, notably financial) and climate change is likely to now far exceed our worst expectations, with a 4-6C degree scenario now likely in a BAU scenario.
This change in thinking was the result of an observation of the way energy and economic issues are panning out, plus a deeper consideration of the role of finance courtesy of systems thinker Nicole Foss. The gist of it is this: we are rapidly losing the chance to persuade policy makers to take the risk of global warming seriously, and given that the course we are now on would likely wipe out nearly all of humanity and make life considerably worse for millions of other species over the coming millennia, then the only sensible option for us is to crash the system of global growth-based capitalism.
If that sounds radical that’s because it is. Holmgren points out that the last few decades of environmental protest have failed miserably. The dominant paradigm of ‘economic growth at any cost’ grinds ecocentrist concerns into the dust. A quick survey of the news headlines should convince anyone of the veracity of this. And although we are now living in an age of limits, where the quantity and quality of the fossil energy sources available to us begins to diminish, the system is perpetuated by the financial system which continues to magic credit out of thin air without any basis on a claim in the real world. Witness the shale oil boom in the US, a vastly inefficient and polluting operation that only makes economic sense due to the distorting wizardry of Wall Street financiers.
Furthermore, he rightly observes that the vast majority of people in the industrialised world could not care less about destroying the basis for life on planet Earth. As the global economic bubble deflates – something it has been doing since 2008 – most people in our overdeveloped economies are too busy trying to hold down a job or are too influenced by the growth-perpetuating mantra of politicians and the media to give much thought to the wider world. This is unfortunate, but at least it demonstrates the pointlessness of trying to gain political traction in a system that is rigged against anything other than limitless growth. Any concessions the system makes to preserving the biosphere tend to be largely symbolic, such as increasing bottle recycling rates, or charging a levy on plastic bags, while the real business of exploitation on a planetary scale continues apace.
Furthermore, the plateauing of oil production has not seen the rapid uptake of clean-tech that its proponents suggested would happen as soon as oil prices climbed. Instead it has seen a switch to dirtier and more dangerous to extract fuels, aided and abetted by the fossil fuel sector and its financial backers. So instead of moving into a ‘green tech’ future we are in practice moving into a ‘brown tech’ one. And although the financial instruments used to boost the production of shale oil and gas are by nature Ponzi schemes and cannot last, Holmgren argues that they may indeed last long enough to make a controlled powerdown situation impossible, as well as missing the window to wean ourselves off fossil fuels.
However, given that the economic system is only being held together by an almost-hallucinatory perception of continued growth and stability which is held by the majority, perhaps this is also the key to seeing its Achilles heel. Holmgren says that a sudden whole scale implosion of the global financial system is really the only hope of curtailing our carbon emissions and cutting them to a level that would avoid runaway global warming. He estimates the chances of a global economic collapse happening ‘naturally’ at 50% over the next five years.
Adopting local currencies, bartering, avoiding paying tax and using the copious quantities of materials lying around as leftovers from the current waste-based economy would be ways of hastening the demise of the planet-destroying system, while simultaneously acting as a good model for late adopters, many of whom would want to ‘join up’ as the current system of industrial production begins to falter. This, he concedes, would also hasten the demise of a good many worthy and progressive projects, and would likely make enemies with those on the left of the political spectrum who rely just as much on the growth of the industrial system as those on the right. Nevertheless, he says, this is a bitter price that must be paid.
Would this be enough to starve the beast? Nobody knows, but it might represent a better expenditure of energy rather than waving a banner outside a climate conference. The system, he maintains, cannot be reformed. Instead it must die and be reborn. He is quite aware that advocating such a view would vilify him and others who could be accused of trying to collapse the economic system, but maintains that we have a duty to protect life on earth by any means necessary from a rapacious class of human being and a system that has got out of control. This is best done by building an alternative parallel economy – one that is not predicated on endless growth.
By a strange coincidence, after I had finished reading David Holmgren’s essay an email popped up in my browser. It was just telling me that Collette O’Neill – the Irish blogger who lives at Bealtaine Cottage – had a new post. I clicked on it and was greeted by a series of pictures and text that are a living example of everything David Holmgren was advocating. It summarised how she herself had turned away from ‘the machine’ and how this had allowed her to build her permaculture cottage and lead the kind of life that many dream could only be possible by, say, winning the lottery. See her example here.
China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.
By Ambrose Evans-Pritchard, International Business Editor
4:12PM BST 16 Jun 2013
The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.
“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation,” said Charlene Chu, the agency’s senior director in Beijing.
“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.
While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.
Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system.
Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term “Shibor” borrowing rates, a sign that liquidity has suddenly dried up. “Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products,” she said.
Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.
This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.
Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.
Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire US commercial banking system in five years,” she said.
The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.
The agency downgraded China’s long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. “The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk,” said Mrs Chu.
“There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can’t grow out of that.”
The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years.
However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.
Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises — and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a “Minsky Moment”, when the debt pyramid collapses under its own weight. “The debt snowball is getting bigger and bigger, without contributing to real activity,” she said.
The latest twist is sudden stress in the overnight lending markets. “We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy,” said Zhiwei Zhang from Nomura.
“There is room to cut interest rates and the reserve ratio in the second half,” wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.
The journal said total credit in China’s financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output,” it said.
It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens,” it wrote.
The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.
Blackstone’s Private Equity Head Warns: “We Are In The Middle Of An Epic Credit Bubble” | Zero Hedge
Blackstone Group have arguably been at the center of inflating the new echo bubble in real estate by bidding (all cash) for property across the US. So it is somewhat ironic that just two months after we noted that “the smartest money is selling,” the head of Blackstone’s Private Equity Group had the following words for an audience at a Dow Jones Equity conference in New York:
“We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career in private equity.”
Joseph Baratta had plenty more to say including “the good times are not going to last forever,” and “we are not leveraging US GDP,” as he expects a ‘mean reversion’ in multiples and “that largesse goes to the seller.”
The U.S. is “in the middle of an epic credit bubble,” according to Blackstone Group’s global head of private equity, Joseph Baratta , and that bubble is affecting how one of the world’s largest private equity firm’s invests its billions….
- Blackstone Announces Third Quarter 2013 Media Call (fool.com)
- Blackstone Argues We’re In an Epic Credit Bubble (krdf.wordpress.com)
- Blackstone Says Private Equity Good Times Just Starting – Bloomberg (bloomberg.com)
“One day this whole credit bubble will be deflated very badly – you are going to experience a complete implosion of all asset prices and the credit system…”
Marc Faber was in fine form at the CLSA Investor Forum, dispensing his trademark gloom and doom. The final keynote was a tour de force of the history of debt, asset bubbles and financial markets in the 20th and 21st centuries.
“Unlike the ’50s and ’70s when there was relatively less overall debt, a financial market crash did not inflict great damage on the economy.
Debt levels are significantly higher these days, and so a market crash can inflict serious damage on economies.
We’ve gone through a period of huge asset inflation, in stocks, bonds, commodities, and real estate, and we essentially now have in the world, a huge asset bubble.
So everything is grossly inflated.”
- This is How Marc Faber Prepares for when The SHTF (silveristhenew.com)
- The end game will be a collapse in the currency: Faber (marketsanity.com)
- Marc Faber: “I always buy gold and I own gold. I don’t even value it” (valuewalk.com)
- Marc Faber: “Fed’s Neo-Keynesian Clowns… Are Holding The World Hostage” (zerohedge.com)
When Bubbles Fail: Albert Edwards Explains What Happens When The Fed Can No Longer Contain The Fury Of The “99%” | Zero Hedge
- The Credit Bubble Is Not Only Back, It Is 94% Bigger Than In 2007 (zerohedge.com)
- Is Global Real Estate Still in a Bubble? (ritholtz.com)
- The Consequences Of QE For The Long-Term (etfdailynews.com)
- Fed’s Williams Says to Spot Bubbles Throw Out Idea Investors Are Rational (blogs.wsj.com)
- Is China an ‘Enormous Tail-Risk’? (ritholtz.com)
- Why Interest Rates Will Explode Again (etfdailynews.com)
- Paul Krugman: This Age of Bubbles (economistsview.typepad.com)
- Asset Bubbles Found by Finnish Economist Inspired by Grandfather (bloomberg.com)
- Three Cheers for the Next Economic Bubble (foreignaffairs.com)
- The Smell Of Collapse Is In The Air (etfdailynews.com)
- Study: Financial Booms May Be Created by Instinctive Behaviors (usnews.com)
- New Research in Economics: Rational Bubbles (economistsview.typepad.com)
- Housing: Another Bubble? When Was the First One? (wallstreetpit.com)
- Paul Krugman: This Age of Bubbles (economistsview.typepad.com)
Financial Times: “World Is Doomed To An Endless Cycle Of Bubble, Financial Crisis And Currency Collapse” | Zero Hedge
- Fed’s Jackson Hole Participants to QE-Exit Whacked Emerging Economies: Drop Dead (nakedcapitalism.com)
- The Immense (and Needless) Human Misery Caused by Speculative Credit Bubbles (charleshughsmith.blogspot.com)
- Marc Faber: It Will End Either Through War Or Financial Collapse (marketdailynews.com)
- Three Cheers for the Next Economic Bubble (foreignaffairs.com)
- Recognizing Bubbles After Creating Them (safehaven.com)
- All the Makings for a Major Top (wchildblog.com)
- Federal Reserve’s Quantitative Easing Making U.S. Economy Fundamentally Weak? (stateofglobe.com)
- U.S. Economy: The Bubble and the Black Hole (darkgovernment.com)